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HMRC internal manual

VAT Business/Non-Business Manual

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HM Revenue & Customs
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VAT Business and Non-Business activities: the business test

The business test has to be applied to the facts of individual cases to work out whether or not the person is engaged in business activities for VAT purposes.

The six questions are:

Is the activity a serious undertaking earnestly pursued?

This asks you to think about whether the activity is carried on for business or daily work rather than for pleasure or daily enjoyment.

Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?

This question comes from Morrison’s Academy (VBNB72050). In that case Lord Cameron said that “the supply must not be merely in sporadic or isolated transactions but continued over an appreciable tract of time and with such frequency as to amount to a recognisable and identifiable activity of the particular person on whom the liability is to fall.”

When thinking about this test you should consider how often the supplies will be made. A supply made only every few years is less likely to be seen as being business than a supply made every day.

However, with very high value supplies this might be less of a factor, for example where a property developer sells an office block once every 5 years.

Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made (bearing in mind that exempt supplies can also be business)?

Again this is a test from Morrison’s Academy (VBNB72050).

You must look at the value of the supplies that are intended to be made. An activity that is intended to bring in £2.50 per week is less likely to be seen as business than one which brings in over £10,000 a week.

Is the activity conducted in a regular manner and on sound and recognised business principles?

This test again comes from Morrison’s Academy (VBNB72050). The judge compared the organisation of the charitable boarding house with its more commercial competitors. He said, “It has every mark of a business activity; it is regular, conducted on sound and recognised business principles, with a structure that can be recognised as providing a familiar constitutional mechanism for carrying on a commercial undertaking, and it has as its declared purpose the provision of goods and services which are of a type provided and exchanged in the course of everyday life and commerce”

Put another way, in providing the accommodation the business may have been motivated by charitable objectives rather than profit. However, they provided a service similar to that provided by a normal business and they were organised in a similar manner.

Relevant information includes, for example, how orders are processed or how internal decisions are made. Businesses have certain professional and commercial characteristics.

For example a new, would be jobbing plumber who does not advertise, keep a diary, give estimates or make any attempt to obtain work may find it hard to show that they are in business. Those are not the business principles that plumbers usually operate under.

Is the activity predominately concerned with the making of taxable supplies for a consideration?

This test can highlight problems. Over the years it has become seen as the most important test.

It is clear from the European Court of Justice (CJEU) case of Apple & Pear Development Council (VBNB72200) that if an activity involves the making of supplies of services for no consideration that these cannot be seen as taxable supplies. An activity that involves making no taxable supplies cannot be business.

This means that projects entirely funded by outside the scope grants, and where there is no additional consideration (for example a membership fee), will not be business.

The test of predominant concern has in the past often been seen as a test of purpose or motivation. In other words, what motivates the supplies?

Such an interpretation does not sit well with Article 9(1) of the Principal VAT Directive. Article 9(1) talks of someone being a taxable person in respect of an activity “whatever the purpose the result of that activity”.

In the High Court appeal of Institute of Chartered Accountants England and Wales (VBNB72200) the court found that the test must be read as asking “What is the real nature of the activity”. In other words is the real nature of the activity the making of taxable supplies for consideration or is it something else?

Although a business activity must include the making of taxable supplies for consideration, activities carried out in preparation can be seen as business even if, in themselves, they do not involve the making of any supplies.

Provided a business can show it has a clear intention to make taxable supplies it can register for VAT. Further guidance on registration procedures and conditions relating to intending traders is provided in VATREG01000.

Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

Someone who claims to be part of a known trade or occupation is likely to be in business. Someone who claims to be in business doing something completely improbable and unique is less likely to be in business.

Although not making a profit, or to having the aim of making one, is not in itself a conclusive test the courts have tended to see it as a good sign. Someone who carries out an activity with the aim of making a profit and to earn a living is most likely in business.